The sight of an Internal Revenue Service mailing is enough to send most taxpayers into a cold sweat. And when that notice is about back taxes owed, it’s easy to want to ignore it.
Don’t. Pay off as much of your tax debt as you can to prevent the IRS from coming after you hard. The agency is much more powerful than the average creditor — it can place a tax lien that puts a legal claim on your property or levy your assets.
In 2015, the IRS counted some 13.4 million delinquent taxpayer accounts, up from 12.4 million a year earlier. The agency also collected nearly $2.3 billion in back taxes.
But as much as the IRS may seem like a bully, it also tries to help struggling taxpayers through the process. Here’s a guide to tax relief options.
What relief programs does the IRS offer?
In 2011, the IRS Fresh Start Initiative launched to alleviate pressure on delinquent taxpayers. It bumped up the amount taxpayers can owe to $10,000 (in most cases) before the IRS issues a federal tax lien. It also adjusted allowable living expenses, factored student loan and local tax payments into approved budgets and more.
If you failed to file a tax return, make a deposit or pay taxes on time due to circumstances beyond your control, you may be able to work with the IRS on handling the penalty payments. Submit a Claim for Refund and Request for Abatement (Form 843).
In some cases, you’ll need to provide extra information. For example, the IRS sometimes requests documentation such as hospital or court records. Also, check out the IRS’ online penalty appeal tool. If you’re appealing a penalty, the charge will continue to accrue throughout the relief application process.
Reasonable cause: Try this option if you “used all ordinary business care and prudence” to meet your tax obligations but couldn’t due to factors such as serious illness, inability to obtain records, fire, natural disaster and more.
First Time Penalty Abatement policy: This applies if you’ve never had to file a return before or had no penalties for the three years prior and have taken steps to file the required returns and pay taxes due.
Other options: If you received incorrect verbal advice from the IRS, you may qualify for administrative relief. If the inaccurate advice was written, ask for a statutory exception. Tax legislation may also give you an out from a penalty — check for exceptions in the Internal Revenue Code.
Offer in Compromise (OIC)
Taxpayers can use the offer in compromise program to settle with the IRS for an amount less than the total tax owed. The Fresh Start program expanded the OIC program, making it available to a larger group of people. Last year, taxpayers proposed 67,000 offers in compromise; the IRS accepted 27,000 of them, amounting to $204.7 million.
The IRS usually settles for whatever amount it believes is the most it can collect from the taxpayer within a reasonable amount of time. But if the agency thinks the taxpayer is capable of paying the full amount as a lump sum or in installments without causing severe financial difficulty, it’s unlikely they will accept an OIC.
On your OIC application, you’ll suggest an amount that you can pay to the IRS in lieu of your actual balance. Then, you’ll submit a lump sum of 20% of that total offer in cash, followed by the rest in five payments or less once you’ve been approved. Alternately, you’ll send in a smaller amount with your application, continue to make installment payments while the IRS reviews your offer and then pay off the remainder monthly once approved.
The IRS will evaluate your ability to pay your balance based on income, expenses and asset equity. If you’re in an open bankruptcy proceeding, you’re ineligible. Check whether you qualify with the IRS’ online tool here.The OIC process can take months, if not years. In cases when the IRS doesn’t make a determination on your application within two years of receiving it, consider your offer accepted. If the IRS rejects your offer, you can request an appeal via Form 13711.
Individual taxpayers who owe up to $50,000 can make monthly payments for up to 72 months, though some may qualify for a short-term agreement if the balance owed is less than $100,000. In some situations, the IRS can’t deny an installment request if you owe less than $10,000, according to the Federal Trade Commission. Businesses must owe $25,000 or less in payroll taxes.
Taxpayers who meet the requirements can apply online. Your outstanding balance will continuously build up interest until it’s paid off. Those who don’t qualify to participate in the online installments program can try their luck by submitting an Installment Agreement Request (Form 9465) and a Collection Information Statement.
Should I hire a tax relief company?
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates.
Dealing with the IRS is not an easy process. You can apply for any of the IRS relief programs without third party help. But if you’re tempted to use an outside intermediary, tread carefully: Tax relief scams are on the rise.
“The truth is that most taxpayers don’t qualify for the programs these fraudsters hawk, their companies don’t settle the tax debt, and in many cases don’t even send the necessary paperwork to the IRS,” according to the FTC. “Adding insult to injury, some of these companies don’t provide refunds, and leave people even further in debt.”
If you’re struggling with your taxes, make sure to reach out to a reputable firm for a free evaluation. When shopping for a tax relief company, look for firms that have tax lawyers on staff, such as Optima Tax, Tax Hardship Center, and Anthem Tax Services.
Tax relief fees
Some of the IRS programs come at a cost. OIC has a non-refundable $186 application fee for anyone above a certain income threshold.
Tax attorneys generally don’t come cheap. Some charge premiums based on where they’re located, others ask for hundreds of dollars in hourly fees. Many require a flat fee to prepare and submit certain paperwork.
Some tax relief companies ask for thousands of dollars upfront, often without explaining how their services will be billed. The FTC said it often receives complaints that such companies later make unauthorized charges to clients’ credit cards or make withdrawals from their bank accounts. If you decide to go with a tax relief company, know their refund policies inside and out and make sure they have qualified attorneys on staff.
Tiffany Hsu no longer writes for SuperMoney. In addition to her work at SuperMoney, Tiffany covered breaking news for New York Times and economic news for The Los Angeles Times. She is a UC Berkeley graduate and earned an M.B.A. from Columbia University.